What’s in scope? 🔬
By Nick Van Osdol
Last month, the California Senate passed a bill requiring that all companies generating more than $1B in revenue annually report their Scope 3 emissions, effectively expanding reporting requirements to include almost all of the emissions associated with their businesses.
Not sure what Scope 3 emissions are? New to the terminology entirely? All good. Here’s a quick rundown:
The Greenhouse Gas (GHG) Protocol defined three different groups (“Scopes”) of emissions as far as emissions accounting for organizations is concerned.
Scope 1 Emissions: ‘Directly’ emitted emissions. E.g.? A coal power plant burns coal to generate electricity. Burning the coal produces emissions.
Scope 2 Emissions: Emissions associated with the purchase of electricity, heat, or cooling. An example?
- Let’s say a tech company runs their own data center that requires a lot of electricity.
- Let’s assume that electricity isn’t generated exclusively by renewables. Perhaps some of it was produced by the coal power plant in our Scope 1 example.
- While the company didn’t emit those emissions themselves, because they purchased the electricity that gave rise to them, those emissions are still attributable to them in a sense.
- They’re Scope 2 emissions for the tech company buying the electricity and Scope 1 for the power plant that generated the electricity.
Scope 3 Emissions: Scope 3 is for… everything else beyond directly produced emissions or those associated with purchasing electricity, heat, or cooling. I.e. all the other emissions in a company’s supply chains and attributable to their operations.
Those are the big three and where the conversation typically stops.
That said, in case that wasn’t enough… there’s increasing talk about the need for a Scope 4 emissions category. The idea? With the rise of work from home and distributed teams, there’s emissions attributable to companies that aren’t confined to a traditional office. Perhaps these should be captured and quantified, too.
One company to watch in this space is EarthUP, whose CEO Stephen Bay wants to empower and galvanize employees to help their employers decarbonize.
The Climate Corporate Accountability Act expands reporting requirements for large California based businesses to include all of their emissions. And since almost all major U.S. corporations do significant business in California, this won’t just be an affair for those headquartered in CA; Walmart won’t get to sit this one out in Bentonville.
It will take some time for reporting requirements to go into effect (2024), but on the enforceability and verification front, the legislation does come with a requirement that the reporting be verified by a third party auditor. Sounds like the pie for third party emissions reporting auditors just grew handsomely 🥧.
While the headline is a win for climate tech (more on that in a sec) and environmentalists, some analysts do fear that pressure from big companies to tackle their Scope 3 emissions will hurt small businesses within their supply chains that haven’t previously had the means to understand or reduce their own emissions footprint. Considering existing supply chain disruptions, if reporting requirements were going into effect now, things could be seriously messy. Nor should we necessarily expect that companies will adequately prepare for these changes.
The new legislation in California is the first drop in the pond as far as more expansive reporting requirements on emissions are concerned. From here, I reckon we’ll see a ripple effect with more states, countries, and other bodies requiring reporting on a more expansive list of emissions. The SEC is already expected to give new federal guidance on climate reporting requirements for all public companies next month.
This is bullish for a small but growing vertical of emissions accounting and reporting companies. While not saturated, this is a space that has been flashing parallel signs of what’s to come; so far this year we’ve seen some big rounds closed by companies like Watershed, which raised a $70M Series B this month.
Watershed hopes to create a one-stop-shop platform for companies to measure and report on their emissions and start the process of reducing them. Other companies, like Planet Fwd, focus on more specific types of companies (consumer brands in their case), helping them unlock deeper industry specific insight about emissions data across their supply chains.
Hardware engineering solutions (and plenty of nature based solutions, too) are what will reduce and remove emissions. As to where software fits in? For this, I was recently reminded of a quote from Lord Kelvin in one of our first podcast recordings
“You can’t improve on what you can’t measure”
If you couple software for measuring and ideally also making emissions and other climate data more public with a regulatory push on compulsory reporting, that can do a lot to ramp up pressure on big companies to show real progress against net zero goals and sustainability.
In turn, there are a lot of midsized operations and smaller companies that haven’t been able to take the time or money to really understand their emissions footprint previously. Armed with more efficient, affordable tools to do so, they’re more likely to pursue decarbonization as well.
MORE COOL STUFF ✌️
What we’re drinking out of ♻️: Recently I caught up with Michael Medvedev, co-founder of Earth Brands. What’s Earth Brand’s mission? Cut down on single-use plastic via products like compostable Earth cups and plant-based hats. Whether you’re planning your next event or merch drop, check out their story, shoot them a follow on IG (@earthcups), or ask me to connect you 🤝!*
What I’m reading 📚: Admittedly feeling a bit overwhelmed by global events, I wound down last night with short stories from Isaac Babel’s Odessa Stories. My small homage; hoping cooler heads prevail in Odessa 100 years on from when Babel wrote about the region ☮️.